Here's a method I use (short article here if any one is interested http://www.myforexdot.org.uk/BestTimeFrameForMovingAverage.html ) -
If the price closes above the SMA then we're long and measure the movement from the close until the next day's close as a positive (favourable) if the following day closes up, and negative (unfavourable) if the following day closes down, and vice versa for shorts. Or in pseudo code -
- If Close > SMA And Next_Days_Close > Close Then record the number of pips the price moved as a positive movement.
- If Close > SMA And Next_Days_Close < Close Then record the number of pips the price moved as a negative movement.
- If Close < SMA And Next_Days_Close < Close Then record the number of pips the price moved as a positive movement.
- If Close < SMA And Next_Days_Close > Close Then record the number of pips the price moved as a negative movement.
Sum all the positive and negative movements and divide the number of pips from the favourable movements by the number of pips from the unfavourable movements - if the number is greater than 1 there is an edge. The further away from 1, the greater the edge. Here is the results on the EURUSD currency pair from the start of 2001 until the 10th of March 2010 -
| Moving Average Length | Number Of Favourable Pips | Number Of Unfavourable Pips | Edge Ratio |
| 10-day SMA | 69,794.2 | 72,414.1 | 0.9638 to 1 |
| 20-day SMA | 70,092.7 | 72,115.6 | 0.9719 to 1 |
| 30-day SMA | 71,366.9 | 70,841.4 | 1.0074 to 1 |
| 40-day SMA | 74,129.2 | 68,079.1 | 1.0889 to 1 |
| 50-day SMA | 73,950.4 | 68,257.9 | 1.0834 to 1 |
| 100-day SMA | 73,340.9 | 68,867.4 | 1.0650 to 1 |
| 200-day SMA | 72,469.4 | 69,738.9 | 1.0391 to 1 |
OK, so those were the results of my experiment. My question is, what moving average times on what pairs do you think provide the best indication to the direction of the market trend? And how do you know they provide the best indication, what method(s) do you use to test this?